Deviations from Purchasing Power Parity: Causes and Welfare Costs

28 Pages Posted: 18 Aug 2000

See all articles by Charles M. Engel

Charles M. Engel

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER); University of Washington - Department of Economics

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Date Written: May 2000

Abstract

We explore deviations from short-run purchasing power parity across European cities, attempting to move beyond a "first generation" of papers that document very large border effects. We document two very distinct types of border effects embedded in relative prices. The first is a "real barriers effect," caused by various barriers to market integration. The second is a sticky-consumer-price cum volatile exchange-rate effect. Both are shown to be important empirically, the second type especially so. We argue that the two effects are very different from each other. For the first type of effect, it is clear that border effects imply deadweight welfare losses. We argue that while the second type of border effect could be eliminated with fixed exchange rates, welfare is not necessarily increased.

Keywords: exchange rates, borders, integration

JEL Classification: F31

Suggested Citation

Engel, Charles M. and Rogers, John H., Deviations from Purchasing Power Parity: Causes and Welfare Costs (May 2000). International Finance Working Paper No. 666. Available at SSRN: https://ssrn.com/abstract=231957 or http://dx.doi.org/10.2139/ssrn.231957

Charles M. Engel (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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University of Washington - Department of Economics ( email )

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John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

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Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

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